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This blog is primarily for me to blog my responses to books that I'm reading. Sometimes I blog about other stuff too, though.

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Thursday, June 8, 2017

Authority and character vs. process and markets

Working in a non-profit setting with a union and a tenure system, you learn certain things about character and its importance, largely because the motivating "sticks" of authority, process, and market forces are all removed from the equation.  There are processes to deal with poor performance, but they are slow and weak, market forces (if they motivate people at all) mostly only motivate them to build themselves up for jobs elsewhere, and arbitrary authority is somewhere between non-existent and plausibly deniable.  Without those sticks, only a sense of duty will push people to do more than the most minimal. (Some readers might think they know which situation or situations I'm referring to, but I might be referring to other situations as well, and I might even have a different take on the particulars than you realize.) There are good things that come with that academic freedom, of course, not the least of which is the safety to take risks, but there

A commonplace observation is that process or market incentives do not suffer from those defects, and to a large extent that is true.  However, it only goes so far.  In a process-oriented institution, the person who's willing to rules-lawyer things can always find a way to get away with the minimum.  You can make the process stricter, but at best that just defines the minimum upward.  It might get more out of people than you were getting before, but in a dynamic setting, the high minimum of one year is neither high nor low but rather irrelevant in another year, because needs have changed.  So then you're back to "Where does it say that I have to..."

The threat to fire is only effective to the extent that it is a feasible decision, and the transaction costs of replacing a person are real.  Some of it can be chalked up to bureaucracy and regulation and litigation risks and all that, but even in the least-regulated "at will" environments the cost of bringing a new person up to speed is real.  The nature of the labor market will determine how easy it is to get someone who requires only minimal time to become productive.

Of course, people can rationally decide to bear a high transaction cost and endure a period of lost productivity because they don't want "the minimum", but that is only rational if you think on a long enough timeline where the message you're sending reaps long-term rewards.  Ultimately, it's rational at one discount rate but not rational at another discount rate.

But real people are not computers.  They can make good decisions, but they can also choose to  incur costs that were ill-advised in hindsight, or luck out and make better decisions than they had any foreseeable odds of making with the available resources.  And that's OK, because we're human.  Process can only take you so far before choking on its own transaction costs, markets can only tell you "Well, it depends on your risk tolerance", and not-strictly-rational "because I said so" decisions carry potential costs (via morale).  Culture and character matter, and when they fail, and when processes and markets fail, "because I said so" is necessary.

We try to avoid that conclusion in the modern world.  To a large extent that's a good thing:  Process in many settings is known as "the rule of law" and it's a very, very good thing.  A reasonable amount of legal process avoids bloodshed, as history shows up.  Too much gums up the gears, creating a space for people to do the minimum. And Arrow's Theorem, Sen's Theorem, and related insights show us that political process isn't much better.

Markets are very good things, as the failures of command economies teach us.  But Coase's Theorem only applies when you have zero transaction costs, complete information, and well-defined property rights.  To the extent that those assumptions fail, room is carved out for people to do the minimum and get away with it. Holmstrom's Theorem bears that out. And with arbitrary exercise of authority comes the opportunity to suck up to the boss and get on the right side.

So we're back to the fact that character and culture matter.

We try to deny that, and as I said it's largely for good reason.  We try to seek the "win-win" solutions.  We try to insist that we're doing things for purely rational reasons, not just because we want to.  But in the end, character and culture matter.

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